Former Treasury Secretary warns of “vicious” fallout if U.S. Treasury demand weakens

Former Treasury Secretary Henry Paulson has called on U.S. policymakers to prepare an emergency response plan for a potential breakdown in demand for U.S. Treasurys, warning that the consequences could be severe.

Speaking in a Bloomberg interview on Thursday, Paulson urged authorities to have a “break-the-glass” framework ready in advance, describing it as a targeted and short-term intervention designed for moments of extreme stress.

“We need an emergency break-the-glass plan, which is targeted and short-term, on the shelf, so it’s ready to go when we hit the wall,” he said. “When we hit it, it will be vicious, so we have to prepare for that eventuality.”

Concerns around the Treasury market have been building as U.S. government debt continues to climb past $39 trillion, raising questions about long-term sustainability and investor appetite. 

Treasurys remain the foundation of global finance, serving as the benchmark against which assets such as corporate bonds, mortgages, and equities are priced. Any disruption in that market risks cascading effects across the financial system.

Economists have long warned of a potential feedback loop where rising debt levels push investors to demand higher yields, increasing borrowing costs, and increasing the fiscal deficit. A scenario where the Treasury struggles to attract sufficient buyers could leave the Federal Reserve stepping in more aggressively, effectively absorbing supply to stabilize markets.

A breakdown in the Treasury market would not leave digital assets untouched, with both upside and downside risks coming into play.

On one side, a loss of confidence in U.S. debt or a wave of monetary expansion could drive capital toward alternative stores of value, including Bitcoin and gold. Inflation concerns and pressure on the dollar have historically strengthened the case for non-sovereign assets.

At the same time, stablecoins introduce a direct link between crypto markets and U.S. government debt. Tether, the largest stablecoin issuer, holds a significant portion of its reserves in Treasurys, including Treasury bills and overnight reverse repurchase agreements.

U.S. Treasury officials have already taken steps aimed at improving market functioning, including a large-scale debt buyback announced on Thursday.

Authorities accepted $15 billion worth of older securities maturing between 2026 and 2028, marking the largest such operation to date. The program is designed to retire less liquid bonds and inject cash back into the system, giving investors room to reallocate capital.

Liquidity management measures like these are intended to keep trading conditions stable, though concerns around long-term demand continue to shape discussions among policymakers and market participants.